1 September: What’s going on in ESG and insurance?
September 1, 2022 Miqdaad Versi
Welcome to our ESG roundup, keeping you up to date on the insurance industry’s most significant ESG-related news. The focus this month: Is ESG really that confusing?
Read our summary and analysis below.
Analysis
There has been significant discussion in mainstream publications about ESG. Some of the key arguments advanced include:
- Does it distract from the fiduciary responsibility to shareholders to maximise their financial return?
- Should companies be advancing political goals?
- ESG is too intangible – shouldn’t we only focus on the “E”?
- When pricing, should underwriters really be taking factors into account that do not directly impact the risk of the customer during the length of the contract?
- Do the current approaches on financed and insurance-linked emissions actually help in achieving net-zero?
- Are carbon offsets a reasonable way to achieve net zero?
Whilst there are some who believe that sustainability concerns are being overplayed, the fundamental question is whether the ESG discussions are focussed on the right areas and achieving their intended goals.
Regardless of your perspective on some of the more challenging questions, to me, it all comes back to the fundamentals:
You need a strategic ambition & proactive management of sustainability concerns: any well-governed (re/)insurer has to have a clear ambition in & be proactively managing an important area in the scope of regulators, investors and their employees; without a top-down strategy, you risk being left behind with the associated reputational risk, as well having a series of bottom-up employee-led initiatives not achieving their goals. Ultimately, it will be up to you how / whether your UW / investment / operations are impacted by sustainability concerns – but not even managing them, is an untenable position
Transparency is no bad thing: if investors, employees and/or the regulator(s) want to understand more about your business, its contribution to net-zero / emissions, its contribution to human rights abuses etc., it is not a bad thing to measure these items and be able to report / disclose them. Collaboration & development of mechanisms to ingest & utilise ESG / emissions data is already becoming the basic expectation…
Shouldn’t you be responsible and help your customers: given the national push to net-zero, does it not make sense that large players in positions of influence, use their expertise to support customers and “nudge” them in the right direction?
The transition will create opportunities: whether it is an expanding renewables market with more sophisticated product requests, disaster relief financing or other transition products (e.g. carbon offset insurance etc.), there will be more opportunities to support the transition further. Doesn’t it make sense to be conscious of these movements?
There are of course details that have to be ironed out (e.g. on ESG data, net-zero methodology for insurers (and reinsurers)), but the fundamentals remain.
Many will debate the details, but the direction of travel is clear, and the fundamentals inescapable. We need to see action.
Summary
ESG regulation and guidance
Confusion about ESG prompts EU watchdog to urge rethinking of rulebook (Insurance Journal)
The European Securities and Markets Authority (ESMA) has called for a rethink of ESG investment rules due to the misinterpretation of the existing framework. The principle issue is the labelling system, which is leaving the impression that funds within a given category will deliver positive ESG results is not the case. The ESMA is therefore supporting the development of more simple and clear information to inform investments.
Read the full article
BMA sets out climate risk management expectations for insurers (Reinsurance News)
The Bermuda Monetary Authority has issued a new guidance note, outlining the BMA’s expectations for commercial insurers management and reporting of climate change risks. The note outlined in detail the BMA’s expectations, including that insurers ensure their governance structure and governance processes embed a forward-looking, prudent, and responsible approach to handling all aspects of climate risks.
Read the full article
(Irish) Central Bank launches consultation on climate change risk guidance for the insurance sector (Central Bank of Ireland)
The Central Bank of Ireland has launched a public consultation on proposals to introduce guidance on climate change risks for the (re)insurance sector. The Central Bank of Ireland has brought in the consultation period due to the increased frequency and severity of weather-related events linked to climate change (and the) impact on the insurance sector globally. The Central Bank Governor Gabriel Makhlouf said he expects to see a “step change” in the way insurers respond to the changing climate, whilst outlining that while there is consensus that action is required, there is uncertainty on what needs to be done and where to begin.
Read the full article
Climate litigation threatens to push up companies’ insurance costs (Financial Times – subscription required)
Climate-related legal action threatens to push corporate insurance costs even higher, with the industry warning that success for activists would force a repricing of cover that has already become more expensive in recent years. Businesses face growing legal threats from activists looking to challenge greenwashing and weak decarbonisation targets. The coming wave of cases has caught the attention of insurers, who say the cost of D&O liability insurance could rise if activists begin to win cases.
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New emissions standard to impact entire insurance industry value chain: UNEP’s Bacani (The Insurer – subscription required)
Butch Bacani, the programme leader at the UN Governed PSI believes that the proposed new standard to measure emissions associated with underwriting portfolios will “change fundamental insurance thinking and practice”. The proposed standard has been created by the Net-Zero Insurance Alliance (NZIA), established through the PSI last year, alongside the Partnership for Carbon Accounting Financials (PCAF). Bacani said the core aim the standard is to “determine how to fairly associate the emissions by actors in the real economy with actors in the insurance industry value chain for accounting purposes”.
Read the full article
ESG litigation
US fossil fuel firm sues insurer for refusing to cover climate lawsuit (Guardian)
Aloha Petroleum, a subsidiary of the US-based Sunoco, is suing AIG for refusing to cover a climate lawsuit in a case that could affect the wider industry’s ability to defend itself from litigation. The world’s biggest greenhouse gas emitters are increasingly being targeted by litigation challenging their inaction on the climate emergency and attempts to spread misinformation. This is one of the first disputes over insurance coverage for climate crisis litigation to be heard in the courts. AIG claim climate litigation is covered by exclusions for “pollution” in their clients general liability policy.
Read the full article
New ESG propositions
Broker Marsh launches world first insurance for hydrogen projects (Reuters)
Marsh has announced that it is launching the world’s first dedicated insurance for hydrogen energy projects. Hydrogen made from renewable energy sources, is seen as a crucial avenue to achieve net-zero emissions targets by 2050. However, project involving hydrogen are often more difficult to find cover for due to its risk profile. The cover is being developed with AIG and Liberty Speciality Markets, and will provide up to $300 million of cover per risk for the construction and start up phases of hydrogen projects globally.
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FM Global to allocate first-of-its-kind resilience credit (Insurance Business)
FM Global has announced it will allocate US$300 million to a first-of-its-kind ‘resilience credit’ to help policyholders invest in climate resilience solutions. The resilience credit has the potential to help its policyholders reduce total loss expectancies related to wind, flood, and wildfire exposure by over US$120 billion, which, in turn, can magnify their positive impact on customers, colleagues, and communities.
Read the full article
ESG investing
Sustainable bond volumes resilient in Q2 despite tighter financial conditions (Moody’s)
Sustainable bond volumes fell less than the broader market, according to the latest Moody’s ESG Solutions Sustainable Finance quarterly market update. Issuance totalled $225bn in Q2 2022, representing 15 percent of total Q2 global issuance – the highest quarterly share on record. This is a part of a more than tripling of sustainable bond volumes since 2019, as investors are incorporating ESG principles into their investment strategies. However new policy and regulation will have implications on future volumes.
Read the full article
